How to solve cash flow problems
Cash flow and accounting

How to solve cash flow problems

If you're like most small-business owners and self-employed individuals, your success depends on your ability to manage cash flow. Cash flow problems can happen to any business, especially if your clients have longer payment cycles. If you're dealing with a cash flow problem, keep reading for our guide to solutions.

What are cash flow problems?

Cash flow problems are when a business has a shortfall of cash. This can happen for many reasons, such as a bad sales month or unexpected expenses. This can lead to gaps in working capital or make it more challenging to meet day-to-day business costs.

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Small business cash flow problems

Small business cash flow problems are very common. Your small business may be having cash flow issues because your customers have longer payment cycles, because you need more money coming in to cover outgoing expenses, or because of economic pressures. You can avoid these problems by proactively planning for them and understanding how invoice finance will help you improve your cash flow.

What are the most common cash flow issues?

Cash flow problems can arise in a variety of ways. Most commonly, they occur as a result of the following:

  • late payments
  • overdue invoices
  • sudden expenses that weren't budgeted for
  • increased costs
  • inflationary pressures

How to solve cash flow problems

The first step to solving a cash flow problem is for you to be able to identify it. Once you know what is causing the issue and how severe it is, then you can take steps to fix it. It's important to work out a solution that improves the underlying source of your cash flow problem and doesn't just treat the symptoms.

You'll also need basic accounting knowledge to understand where your money goes and determine whether or not there's a problem in the first place. If your books are balanced and your financial statements are correct, it will be easier to know where the problem lies.

How to avoid cash flow problems

The best way to avoid cash flow problems is to keep track of your business's cash flow. You can do this in several ways, but the most common are:

  • Cash flow forecasting. This is a simple way to see where you stand at any given moment. It's based on historical data and takes into account seasonal trends and business cycles, so you can see when you need to make adjustments.
  • A cash flow budget. A cash budget is another way to look at where your money will come from and where it will go. These projections can be more detailed than forecasts, but both should be based on actual numbers from previous years. If things change drastically from year to year (such as a big increase in sales), it's wise to go back — perhaps five years or longer — so that you have enough history to make an accurate projection for the future.
  • A cash flow statement. A forecast shows what you expect to happen over a specific period — usually six months or a year ahead — while a statement shows what happened during that period according to actual numbers from your accounting system.

One of the best ways to avoid cash flow problems is to be proactive, not reactive. If you're still in the early stages of cash flow management, consider hiring a financial consultant to help you make sure your business plan is realistic and practical.

Strategies to improve cash flow

Here are some key strategies to help cash flow in your small business:

Improve cash flow with invoice finance

Invoice financing can be a great way to get it if you need some quick cash. This short-term loan allows you to borrow up to 85% of the value of your unpaid invoices. It also allows you to extend your payments and repayments over a longer period than conventional loans.

Set up a budget

You don't have to be an accountant or financial planner—just write down how much money comes in each month and how much goes out during that period. A simple template can help keep track of expenses like rent or mortgage payments, utilities, employee costs, and so on.

Know your customers

Know when they pay, how much they owe and when they will pay next. This will help you avoid being surprised by a customer who wants to delay payment or pay only part of what is owed. Know where your money comes from

Keep track of how much money comes in from different sources (cash sales, credit card sales, checks and so on). This will help you see where your business stands at any given time.

Invest in financial management

Your cash flow problems may be the result of inefficient financial management. For example, if you're using outdated accounting tools—like spreadsheets or manual bookkeeping—to track your finances, then chances are those systems are contributing to your challenges in this area.

You may also be overspending on unnecessary expenses and missing out on opportunities for cost savings. In either case, it's worth looking at how your business manages its money so that you can improve its efficiency and get back on track with its finances.

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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